Question

1.

Bellue Inc. manufactures a single product. Variable costing net operating income was $98,200 last year and its inventory decreased by 2,100 units. Fixed manufacturing overhead cost was $1 per unit for both units in beginning and in ending inventory. What was the absorption costing net operating income last year?

Multiple Choice

$2,100

$96,100

$98,200

$100,300

2.

Croft Corporation produces a single product. Last year, the company had a net operating income of $93,980 using absorption costing and $78,700 using variable costing. The fixed manufacturing overhead cost was $8 per unit. There were no beginning inventories. If 22,200 units were produced last year, then sales last year were:

Multiple Choice

6,920 units

20,290 units

24,110 units

37,480 units

3.

Bennette Corporation has provided the following data concerning its overhead costs for the coming year:

Wages and salaries	$	510,000
Depreciation		205,000
Rent		225,000
Total	$	940,000

The company has an activity-based costing system with the following three activity cost pools and estimated activity for the coming year:

Activity Cost Pool	Total Activity
Assembly	45,000	labor-hours
Order processing	450	orders
Other	Not applicable

The Other activity cost pool does not have a measure of activity; it is used to accumulate costs of idle capacity and organization-sustaining costs.

The distribution of resource consumption across activity cost pools is given below:

	Activity Cost Pools
	Assembly	Order Processing		Other	Total
Wages and salaries	35%	30%		35%	100%
Depreciation	15%	45%		40%	100%
Rent	35%	30%		35%	100%

The activity rate for the Order Processing activity cost pool is closest to:

Multiple Choice

$695 per order

$685 per order

$545 per order

$705 per order

Answer 1

1) Under Variable costing income statement, fixed overhead is considered as period cost whereas under absorption costing income statement fixed overhead is considered as a part of product costs.

Last year decrease in inventory is 2,100 units

Fixed manufacturing overhead cost per unit = $1 per unit

Fixed manufacturing overhead cost released from inventory = 2,100 units*$1 per unit = $2,100

Absorption costing net income = Variable costing net income - Fixed manufacturing OH released from inventory

= $98,200 - $2,100 = $96,100

Therefore the absorption costing net operating income last year was $96,100.

2) Fixed manufacturing OH cost in ending inventory = Absorption costing net income - Variable costing net income

= $93,980 - $78,700 = $15,280

Fixed manufacturing OH cost per unit = $8 per unit

Ending inventory in units = Fixed manuf. OH cost in Ending Inventory/Fixed manuf. OH cost per unit

= $15,280/$8 per unit = 1,910 units

Units sold = Units produced - Ending inventory in units

= 22,200 units - 1,910 units = 20,290 units

Therefore the sales last year were 20,290 units

3) Firstly we need to calculate total cost allocated to Order Processing activity

Order Processing Activity cost = 30% of wages and salaries+45% of Depreciation+30% of Rent

= ($510,000*30%)+($205,000*45%)+($225,000*30%)

= $153,000+$92,250+$67,500 = $312,750

Order Processing activity cost pool = 450 orders

Activity rate for the Order Processing activity = $312,750/450 orders = $695 per order

Hence the activity rate for the Order Processing activity cost pool is closest to $695 per order.